Factors That Determine Auto Insurance Premiums
There’s a truckload of factors used to determine the costs and requirements for vehicle insurance. Each state has specific rules, and your insurance agent can help you understand what’s required in your state.
The most common factors include:
Age and experience
Statistics show that inexperienced and elderly drivers are more likely to make driving errors because often these age groups do not have the faculties to react in time to avoid a mistake. Insurance agencies consider your age and experience and compare them with statistics of other drivers in your demographic to determine your rates.
Just like how you use your vehicle is an indicator of risk, how many miles you drive yearly also indicates the level of risk involved in insuring you. How far you drive on average will be factored in with pricing. The more you drive, the more you pay.
This report includes how many times you filed for insurance reimbursement or coverage. Agencies use that information to determine the level of risk you might pose. For example, an accident where you were found at fault, an insurer will consider you more of a risk to cover and can charge a higher premium for your coverage.
If you own a classic car you will need specialized insurance because standard insurance coverage may not be adequate for the amount of money you have invested in your vehicle. Qualifying for this type of insurance requires you to meet certain stipulations, however, classic car insurance might be less expensive than traditional car insurance and offer better coverage as well. A couple of great resources for classic car insurance include Hagerty.com and Grundy.com.
From discounts to down payments and monthly payments, the cost of your premium is dependent on your credit score. Insurers will look at how you handle your credit as an indicator of how likely you are to pay premiums, file claims, and even commit insurance fraud. A low credit score can require a higher down payment for your coverage, while a high score can result in a discount based on creditworthiness.
Speeding tickets, accidents, and DUIs are costly not just at the time they occur, but also when paying for insurance. Your driving record is your report card to insurance companies. A clean driving record will result in lower insurance rates, while a blemished record will bring higher rates. Your first speeding ticket may carry no increase or a minimal increase to your rates, while a DUI can double your rates.
Driving statistics vary enough between genders to pose a risk factor. For example, younger males statistically drive more and can be more aggressive than younger females; therefore, premiums can rise or fall based on their age and gender.
Insurance agencies factor in where you live into coverage costs. Geographic metrics on weather, crime rates, and the population all play a role in the likelihood of risk. If you live in a flood-prone area, hurricane or tornadoes zone, or if car theft runs high in your area, the chances are higher that you’ll need to file a claim at some point; therefore, insurance premiums are higher.
Again, statics matter. When compared to single drivers, married drivers are less likely to be a risk due to lifestyle factors like driving less often and driving safer. Single drivers pay a higher insurance premium than married drivers.
Did you know even a one-day lapse in insurance coverage can result in higher rates? To insurers, continuous coverage shows a good big picture of your riskiness. Even continuous coverage history with different companies or part of a shared policy (parents or spouse) can lower your rates. If you have a vehicle, but you don’t plan on driving for a long time, the recommendation is that you keep that policy active and contact your agency about reducing coverage to save costs.
To an insurance company, vehicle types, such as sports cars are statistically involved in more speed-related collisions. Agents also look at your make and model’s purchase price, cost of repairs, theft rates, safety rates, and accident rates when determining premiums. An exotic car with specialty parts will cost more to replace (or repair) and thus will cost more to insure. On the other hand, a vehicle with the latest safety features may keep you safer, but should you file a claim, the price to repair those features could be costly.
A daily commute will cost more to insure than the same vehicle if you work from home. Why? It’s because a rise in use raises your risk. A vehicle used for business purposes may cost even more due to more usage. A vehicle used for business, and if that business is ride-sharing, may cost even more. Higher usage and more people using the vehicle will bring, you guessed it, a rise in cost.
This part of an insurance policy covers the financial damages to your vehicle caused by accidents with other vehicles or objects.
Without collision insurance, the cost of repair for your car is paid by you. If you are leasing a vehicle, it’s common that collision coverage will be required.
If your vehicle is stolen, this coverage comes into play. In addition to theft, it also helps pay for the damage caused by non-collision related damage to your vehicle. Incidents like glass breakage, fire, animal, vandalism, weather, or some items not covered by the collision section of your policy are often included as a part of comprehensive coverage.
This type of insurance is often required by state laws to register a vehicle or legally drive your vehicle. Liability covers the costs of damages caused to others as a result of accidents where you are found to be at fault and include bodily damage and damage to the personal property. The more liability coverage that you add to your policy, the more your policy will cost. That is often a wise investment because should you be held responsible and your liability insurance limit is maxed out, you could legally be responsible for out-of-pocket costs owed to the other party. You can be subject to wage/tax garnishment, and your personal assets can be legally seized if your insurance coverage is not sufficient to cover the damages you caused. At a minimum, the amount of liability insurance you have should legally cover you in your home state, but even better, it also should cover the costs of your assets (home, other vehicles, etc.).
Putting together the insurance coverage for your vehicles will look something like this example on your policy. Keep in mind that the dollar amounts can be adjusted and are based on how much coverage you purchase.
15 = Maximum coverage of bodily injury for an individual $15,000
30 = Maximum coverage of bodily injury per claim $30,000
10 = Maximum coverage provided for property damage per claim $10,000
1. No-Fault or Personal Injury Protection (PIP)
Regardless of who is at fault for an accident, this coverage is for the medical expenses incurred for you (the driver) and your passengers. This insurance type also applies during situations when your health insurance coverage has been maxed out or losses of income from accident-related injuries and funeral expenses.
If another driver is at-fault for an accident and does not have insurance or the other driver has less than enough coverage to pay the costs of injuries or damages, this option covers costs. Depending on how much coverage you purchased in advance, it will pay partially or fully. It also covers hit-and-run accidents.
3. GAP (Guaranteed Auto Protection)
If you are financing or leasing a vehicle, and the cost to repair the vehicle from an accident is more than the amount you owe on the car, this coverage will help pay the difference. GAP can be applied when the insurance company considers the vehicle “totaled” (too damaged or costly to repair). For example, you still owe $20,000 on your car loan, but the current value of the car is $17,000, so the insurance will only pay the current value of $17k. The remaining $3K is still owed and would be your responsibility to pay. Paying the $3,000 back to the lender for a vehicle that you don’t even have anymore is not fun. Hence the need for GAP insurance.
If your car is stolen, your insurer pays you the current value of your vehicle, minus your deductible.
Car value $20,000
Minus deductible of $1,000
Insurer pays you $19,000
If your windshield is broken and the car is not totaled, the insurance payment will work like this:
Replace windshield cost $800
Minus Deductible $1,000
The amount of your deductible will cover the repair, so you receive zero from the insurer.
More About Deductibles
Deductible amounts typically range anywhere from $100 to $2,000, but there’s never a wrong choice when selecting a deductible. It comes down to what you prefer:
Higher deductible = Betting against having an accident and benefits by enjoying a lower car insurance premium and higher out of pocket costs
Lower deductible = Higher probability of an accident means higher car insurance premium and lower out of pocket costs
Choose an amount you’re comfortable with, but always consider the value of your vehicle. If your car is only worth $1,200, for instance, then it probably wouldn’t make sense to choose full coverage and a $1,000 deductible. Whatever deductible you choose, make sure you’re able to afford to pay that amount in the event of a claim.
Actual Cash Value (ACV) – The amount of money an insurer will pay in the event of a loss, replacement, or repair.
Annual Maximum – The most money a dental plan pays for dental care under the terms of your policy within a 12-month benefit period. Any amount over the annual maximum is paid by the insured.
Beneficiary – Any person(s) receiving benefits provided by an insurance policy.
Bundling – Purchasing two or more insurance policies with the same company for a price discount.
Claim – A request for insurance company compensation as part of policy coverage for a covered loss.
Collision Coverage – Insurance to repair or replace a vehicle damaged in a collision, regardless of who is at fault.
Comprehensive Coverage – Insurance protection for vehicle damages that occur in an event other than a collision. Including theft, natural disasters, vandalism, and most things not covered by collision coverage.
Co-payment – A fixed amount of payment made by a beneficiary (especially for health services) in addition to that made by an insurer.
Coverage – The protection against financial loss provided by an insurance contract for policy specific inclusions.
Deductible – A set amount of money required by you to pay towards care, damages, replacement, or repair costs before your insurance coverage kicks in to cover additional or remaining costs.
Dental health maintenance organization (DHMO) – A structured type of dental plan with provider approved dentists and services negotiated to offer reduced prices to the policyholder.
Dental indemnity plan – A dental insurance plan offering the policyholder a more personal selection of dentists and services, with insurance also paying more of the costs. This plan typically has the highest premiums.
Dental preferred provider organization (DPPO) – A dental insurance plan allowing policyholders to work with dentists that are in or out of the plan’s network, with out-of-network providers costing the policyholder more for services.
Depreciation – A decrease in the value of property (e.g., house, car, roof, water heater, etc.) due to wear and tear or becoming obsolete.
Elimination period – The time period between an injury and the receipt of benefit coverage or payments.
HMO: Health Maintenance Organization – Health Maintenance Organization (HMO). A type of health insurance plan that usually limits coverage to care from doctors who work for or contract with the HMO.
In-network – Refers to healthcare service providers whose services are contracted with your insurance company, and services are less expensive than out-of-network providers.
Insurance Rider – A rider is an insurance policy provision that adds benefits to or amends the terms of a basic insurance policy. For an additional cost, riders provide insured parties with options such as additional coverage, or they may even restrict or limit coverage. A rider is also referred to as an insurance endorsement. It can be added to policies that cover life, homes, autos, and rental units.
Lapse – The portion of uninsured time between policies caused by the termination of a policy for non-payment or other unmet contractual requirements.
Liability Coverage – A basic level of vehicle insurance where a minimum amount of coverage is required by law. Often set by each state individually and can vary widely.
Loss – The injury or damage sustained by the insured that the insurance company agrees to cover.
Market Value – The estimation of how much your property is worth if sold today.
Negligence – A lack of reasonable care exercised by a person/party in a given situation.
No-Fault Insurance – A type of car insurance for covering the costs of medical, hospital, and funeral expenses that result from a car accident —regardless of who is at fault. Also called Personal Injury Protection (PIP) Insurance.
Out-of-network – Refers to healthcare service providers who do not have negotiated rates with an insurance company, with services often costing more than in-network providers.
Personal Injury Protection (PIP) Insurance – See No-Fault Insurance.
Policy – A formal contract of insurance consisting of terms, conditions, and coverage specifics.
Policy Length – Or policy duration is the length of time during which an insurance policy remains valid—ranging from months to years depending on insurance type.
Policy Owner – Person or party named in the policy, having the authority to make policy changes.
PPO: Preferred Provider Organization – A healthcare provider who has a contract with your insurance company to provide services to you at a discount.
Premium – The amount of money an insurance company charges for providing coverage.
Reinstatement – The reactivation of a policy after a lapse in coverage.
Replacement Cost Value (RCV) – Coverage paying for the replacement or repair costs to restore damaged property to pre-damaged condition.
Term – The length of time for policy coverage. Also, see policy length.
Total Loss/Totaled – Property damage determined by the insurance provider to be destroyed or exceeds the cost of repair.
Underinsured Motorist Coverage – Coverage for bodily injury or property losses caused by a motorist with coverage insufficient in covering the full amount of damage costs.
Uninsured Motorist Coverage – Similar to underinsured coverage, uninsured coverage can help pay for damages when an at-fault driver uninsured, so instead of their policy covering the costs, your policy would.
Waiting Period – A period of time an insured must wait before some or all of coverage is available. The insured may not receive benefits for claims filed during the waiting period.